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Value Chain ManagementValue Chain Management

Avoiding Waste (muda)

9-2© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

OverviewOverview

How to achieve superior quality, efficiency and responsiveness to customers by managing your value chain properly

How to implement Total Quality Management (TQM)

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OverviewOverview

Why innovation and effective product development are crucial components of competitive advantage

How to avoid smothering innovation with Value Chain Management (VCM) and Total Quality Management (TQM)

Discipline versus creativity

9-4© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Premium Wine over the InternetPremium Wine over the Internet

One 12-bottle Case Package: 3 pounds (5%) Wine: 22 pounds (39%) Bottles: 33 pounds (56%) Total: 58 pounds

9-5© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Wine ExampleWine Example

FedEx ground: $36

About 62 cents per pound or…

1. Box: $1.80

2. Wine: $14.00

3. Glass: $20.00

9-6© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

WasteWaste

$20 to make thiss marketing statement:

“I’m heavy so I must be good.”

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Beaujolais PlastiqueBeaujolais Plastique

Boisset Family Estates in France using plastic bottles for its Beaujolais (BusinessWeek 9/29/08, p. 19).

9-8© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Value ChainValue Chain

Coordinated activities that transform four inputs (manpower, money, material, information) into goods or services customers want to buy Design/engineering Purchasing Production Materials management Information systems Marketing, sales and service

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Value ChainValue ChainProduct Development

Research customer needs and desires then design and manufacture a new product or improve an existing one to meet them

ProductionProduce the goods or service

Marketing and Sales Create the perception of product value and motivate customers to buy

Service functionProvide loyalty-building after-sales service and support to the customer; get them to come back

9-10© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Value ChainValue Chain

Materials management function Controls the movement of physical materials

through the value chain – avoid waste and make money (JIT) – “pulling on a rope”

Information systems function Electronic system to minimize inventory, track

sales, price products and – most important – managing the customer relationship to build market share and loyalty; quick, lean and accurate

9-11© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Value Chain ManagementValue Chain Management

Value Chain Management

Improve the process of turning inputs into outputs by removing waste to increase value; requires that all company activities be defined in terms of customer needs (commoditize input and differentiate output)

9-12© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Strategies to Build Competitive Advantage

Strategies to Build Competitive Advantage

1. Superior efficiency, quality, flexibility, speed, innovation and responsiveness to customers

2. Simultaneously generate cost savings and build product reputation so you can charge more

3. Re-invest in product and process, further increasing competitive advantage

4. Do it over and over, better and better to gain and sustain competitive advantage

9-13© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Improving Responsiveness to Customers

Improving Responsiveness to Customers

What do customers want? Everything:Low priceHigh qualityMany featuresProducts customized to their needsExcellent after-sale support

EVERYTHING!

You do not want to be at their mercy

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Price versus AttributesPrice versus Attributes

Strike a balance between cost and featuresFirms offering high quality, fast service and

other attributes customers desire may have to raise prices to cover additional costs

Operations management focuses on lowering production costs or producing more features at the same cost

A firm can enhance its competitiveness by increasing the price/feature relationship; example -- Toyota and Hyundai

9-15© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Improving QualityImproving Quality

The concept of quality applies to the products of both manufacturing and service firms A firm that provides higher quality than competitors

at the same or a lesser price will please customers and gain market share

Higher quality also can increase efficiency by decreasing waste and operating costs (quality as a cost-saving technique).

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Impact of Increased Quality“High” and “Low” Road

Impact of Increased Quality“High” and “Low” Road

Figure 9.4

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Total Quality ManagementTotal Quality Management

Total Quality Management (TQM) A company-wide management philosophy

that focuses all activities on improving the quality of a firm’s goods or services

Primary principle: customer defines quality Developed by Deming, Juran, and

Feigenbaum.

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Steps to Successful TQM Implementation

Steps to Successful TQM Implementation

Build organizational commitment to quality

Focus on the customerFind ways to measure

quality (KPIs)Solicit input from employeesSet goals and create

incentivesIdentify defects and trace to

root cause

Introduce just-in-time (JIT) inventory systems

Work closely with suppliers

Design for ease of production

Break down barriers between functions

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Improving EfficiencyImproving Efficiency

Improved efficiency leads to lower costs and better performance.

TQM and Efficiency> TQM can lead to much higher labor productivity> When quality rises, less is wasted on scrap and rework.> Example: Ford’s “dinosaur pen”

9-20© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

WarningWarning

TQM and VCM (left-brain) can smother creativity (right-brain) by defining false starts and exploration as “waste.”

Solution: > protect R&D from the value-chain

disciplinarians.> celebrate/learn from mistakes instead

of punishing them

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Flexible ManufacturingGigs instead of Jigs

Flexible ManufacturingGigs instead of Jigs

Most firms face major expenses when setting up to produce a product. These costs must be paid before production begins

(Example: $1.8-billion TMMT). The more often products to be built change, the higher setup

costs become. Flexible manufacturing reduces setup costs by reducing

the time required to reset the production line for a different product. Using easily replaced or reprogrammable manufacturing

equipment Redesigning the production system itself to be more productive.

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Just-in-Time Inventory and Efficiency

Just-in-Time Inventory and Efficiency

Just-in-Time (JIT) Inventory system Originally developed by Toyota; also adds to

efficient production. JIT reduces inventory holding costs for warehousing,

storage, tracking, and the cost of capital tied up in inventory (beware of supplier transfer); also reveals problems

A drawback to JIT is that a firm does not maintain a large buffer stock of parts which makes the firm vulnerable to strikes or supply problems that can quickly deplete on-hand inventories and shut down production.

9-23© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Efficient ManufacturingEfficient Manufacturing

Self-managed teams boost efficiency by allowing a flatter organization.

The team takes on the role of the supervisor.Teams working

together often become very skilled at enhancing productivity

9-24© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Process Reengineering and Efficiency

Process Reengineering and Efficiency

Process Re-engineeringThe fundamental rethinking and redesign of

the business process in order to dramatically improve performance. > Boosts efficiency with activities that add value to

the product and deletes those that don’t

> Example: Toyota’s TQM “black belts”

9-25© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Product InnovationProduct Innovation

Quantum innovation: developing a radically different product or service that meets new, emerging customer needs, provides first-mover advantage and makes existing products or services obsolete

Incremental innovation: gradual improvement and refinement of existing products and services to keep them at the leading edge of existing customer needs

9-26© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Effective Product-development Strategies

Effective Product-development Strategies

Involve both suppliers and customers in order to enhance quality/value and improve “fit.”

Force choice among competing projects to avoid spreading product-development support too thinly.

Use cross-functional teams.

9-27© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Effective Product-development Strategies

Effective Product-development Strategies

Study the environment, including future intentions of competitors

Identify potential new customersIdentify suppliers with the best

emerging technology and get them on your side